If you have an e-commerce business, provide SaaS (software as a service), or sell digital goods, you may have customers in multiple states and even multiple countries. When your customer base is that widespread, keeping up with the many differing sales tax requirements can quickly become overwhelming.
And that’s in part because it’s not just state laws that you have to worry about. In some locations, you also have to follow rules set by local taxing authorities, including cities, counties, and special tax jurisdictions.
States where you must follow these local rules are home rule states. Not all home rule states allow jurisdictions to collect their own taxes. Fortunately, not many do, but if you have customers in one of them, you need to understand how to stay in compliance there to avoid audits and potential penalties.
This guide will explain which states have home rule laws that extend to taxation, and how these sales tax rules work, so you can meet your obligations and avoid the consequences of noncompliance
What is home rule authority?
In some states, home rule authority extends to fiscal matters and allows individual jurisdictions to establish and enforce their own sales and use tax rules, which are separate from the state's requirements.
In most states, there is one centralized taxing authority that handles sales and use tax collection and distribution — for example, the New York State Department of Taxation and Finance or the Georgia Department of Revenue.
If your company has physical nexus (which means that you have a physical presence) or economic nexus (which means that you do a certain amount of business) in one of these states, you must register with that single authority and comply with its rules regarding which products are taxable and at what rate. You also must file tax forms and remit payments to that authority.
In home rule states that extend the right to collect sales tax to local jurisdictions, on the other hand, you may still have to register with the statewide taxing authority — but that is not the end of your sales and use tax obligation. You also have to comply with rules set by individual locations within the state. This means:
- Each local area can set its own tax rates.
- Each area can define its own rules for what is taxable and nontaxable.
- You may have to register within each local area.
- You may have to submit tax returns within each local area.
Unsurprisingly, this means that doing business in these states can be quite complex, because once you have nexus, you don't have just a single set of tax rules to comply with; you have many new rules to follow.
How does home rule taxing authority work?
Fortunately, only a small number of states allow local jurisdictions to determine their own sales tax — including Alabama, Alaska, Arizona, Colorado, Idaho, Illinois, and Louisiana, although the level of authority that these states grant to local areas varies. Here's how things work in each location.
Alabama
According to Alabama's Department of Revenue, the state administers more than 200 different city and county sales taxes, but it doesn't administer all city and county sales taxes, so sellers are advised to contact each local area to understand their registration requirements.
The Department of Revenue has established a Simplified Sellers Use Tax (SSUT) program that allows remote sellers to pay an 8% flat rate, which relieves them of the obligation to separately comply with most state and local tax rules.
Alaska
There is no state tax in Alaska, but there are more than 100 taxing municipalities in the state. Alaska's Department of Commerce, Community, and Economic Development makes it clear that those cities and boroughs have very broad authority in enacting sales tax ordinances, determining what items are taxable, and collecting sales taxes from sellers.
Arizona
According to the Arizona Department of Revenue, when selling products or services subject to the transaction privilege tax (the official name of the state's sales tax), sellers usually need a license from the state, as well as from the cities or counties in which they operate. The Department of Revenue will collect taxes for counties and cities, but the tax rate varies, based on location and type of business activity.
Colorado
State sales and use taxes in Colorado are collected by the The Colorado Department of Revenue, which also collects sales and use tax on behalf of "several" local areas including cities, counties, and special districts.
When the Department of Revenue collects revenue, the jurisdiction it collects for is called a "state-collected" jurisdiction. In state-collected jurisdictions, sales tax is administered in the same way as state sales tax, so items subject to state sales tax will also be subject to local tax.
Among the state's counties, only Denver County and Broomfield County are not state-collected jurisdictions. They are called self-collected districts because they enacted a "home rule" charter and determined that they wanted to collect their own revenue. They can impose different guidelines on which items are taxable by the state.
However, there are more than 70 home rule municipalities in Colorado that do their own tax collection and have their own rules. You can find a list in this Department of Revenue sales/use tax rates list. You'll need to follow the local rules in any of these jurisdictions where you sell goods and services.
Louisiana
Local areas in Louisiana can establish their own rules and collect their own sales taxes, separate from those collected by the state.
The Jefferson Parish Sheriff's Office, for example, explains that "The Parish of Jefferson, the Jefferson Parish School Board, the Law Enforcement District of Jefferson Parish, the City of Kenner, and the City of Harahan levy a local sales/use tax. All local levies of sales/use taxes are in addition to the sales/use tax imposed by the State of Louisiana."
Idaho
The Idaho State Tax Commission explains that many local areas — and especially resort communities — charge local taxes in addition to state taxes. They are often called "local "option" taxes since voters in the community can establish them.
Illinois
According to the Illinois Department of Revenue, "home rule units of local government are authorized to impose a home rule sales tax, and certain non-home rule units of local government are authorized to impose a non-home rule sales tax to be collected by the Department."
The Department of Revenue collects sales taxes for jurisdictions in the state, with the exception of Chicago.
An example of the complexities of home rule
Life can become complicated for companies with customers in home rule states for many reasons. For example, your product may be taxable in one part of the state and not in another. Say, for example, your company sells subscriptions to SaaS to customers in Colorado.
SaaS isn't taxable in Colorado, so you don't have to worry about paying state sales tax. However, it is taxable in some cities and municipalities, including Boulder. You would need to be aware that you may have tax obligations in Colorado even though the state as a whole doesn't tax your product.
You would then need to find out Boulder's rules for when you must register to collect local taxes, based on whether you have economic nexus, under Ordinance No 8457. If you do have economic nexus, you'll need to register to collect sales tax, determine the tax rates to charge, file tax forms, likely through the Boulder Online Tax System, and pay the sales tax due as required.
Unfortunately, if you assume that you don't have to keep Colorado on your radar when it comes to tax compliance because the state itself doesn't charge tax on SaaS, you could end up overlooking Boulder’s requirements.
This is just one of many locations where you may encounter a similar variance in state and local rules, depending on what you sell.
Staying compliant in home rule jurisdictions
When you do business in home rule states that allow local jurisdictions to impose sales tax, compliance becomes much harder because
- You have to determine whether you have a nexus in each locality.
- If you do have nexus, you need to register and file sales tax returns, potentially in multiple counties or cities.
- You need to understand the rules for which items are taxable and exempt in each location.
- You must understand the different tax rates that apply to items you are selling in each jurisdiction.
- You must collect and remit the taxes due by each location's deadline.
- You have to track different tax holidays in different locations.
Unfortunately, this lack of uniformity increases the risk of an audit and significantly adds to your compliance burdens. Fortunately, a sales tax management platform like Numeral can make compliance nearly effortless. Numeral can automatically track nexus for you, including in local communities in home rule states, and can register for you when it becomes required.
Numeral will also take care of collecting the correct amount of sales tax on the right products, remit payment on schedule, and even handle your mail for you. You can spend just five minutes a month on sales tax compliance with Numeral's help, no matter how many states, counties, and cities you have tax obligations in.
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Final Thoughts
While sales tax compliance is always complicated, home rule states take the complexity to the next level.
From tracking nexus in multiple locations to determining which products are taxable and at what rate in hundreds of different jurisdictions, managing the process can feel impossible, but Numeral makes the impossible simple.
